Outsourcing remains a key part of the IT strategy of many organisations, to the extent that it there are now estimated to be in excess of 10,000 vendors in more than 175 countries claiming to offer some form of offshore outsourcing service. Unsurprisingly, the main driver for this is still the desire by customers to achieve some kind of cost saving, despite the fact that many of these providers would have us think that improved quality is the main outcome of using outsourced IT services.
There is also a push by organisations for renewed revenue building and IT/business alignment strategies, as a result of the general upturn in global markets (and thus company performance). This is expected to drive the Business Process Outsourcing (BPO) offshoring market place as much as anything, although it will filter across to IT as well, as organisations look to get more recognisable value from their IT commitments.
In order to cut costs, improve quality, or build business, many organisations either have an offshore presence or are considering developing one, but the big question is build-versus-buy: should the organisation develop its own offshore presence or use a third party? In order to answer this question, one initially needs to decide what is to be offshored, as different models are appropriate in different situations.
If single projects are to be offshored on an ad hoc basis, the transactional partnering model is likely to be the most appropriate, and this model is also good for organisations unsure about offshoring, to be used as a "trial". It requires only a small commitment from the customer organisation, but at the same time it should be remembered that this level of commitment is also true for the offshoring provider. To sound a note of caution, it does not necessarily follow that if the offshoring provider performs an individual project well that it can perform equally well for larger projects or longer term outsourcing.
Tactical partnering is the next level, which is effectively an Offshore Development Centre (ODC). This generally means a contract between provider and customer of around three years, and occasionally up to seven years, thus is more of a commitment for both customer and provider. As part of the longer term commitment the provider promises to deliver specified outputs according to the customer's requirements during the lifetime of the contract, and normally this would also include a growth plan. A "process manual" is used to detail how the outsourced work should be done, as well as how the technical and people interfaces are expected to work. Additionally, Service Level Agreements (SLAs) should be defined and regularly reviewed.
The Build, Operate, and Transfer (BOT) model, also known as collaborative partnering, is a step on from tactical partnering, although it provides the same functions. The contracts are generally for the same period, but the ability to transfer ownership of the offshore function to the customer organisation at the end of the contract (or before) is the crucial difference. Ness Technologies, through its division Ness Managed Labs, is one example of an offshore provider that offers the BOT model to software organisations looking to outsource or expand their R&D functionality, and it is indeed proving a popular model for organisations that are looking to outsource for a medium length of time. The BOT model allows customer organisations to get comfortable with working with an offshore company, and the...
...specific location, before taking everything back in-house, whilst retaining the offshore centres.
Strategic partnering, or a joint venture, occurs when the outsourcing organisation establishes a presence in the specific location where the outsourced work is to be performed. Thus, it sets up its own operation in that particular location, with the help of a local company. An outsourcing provider organisation would offer its partner local knowledge and local management skills in order to get the operation up and running. According to Business Insights the biggest challenge with a joint venture relates to the merging of two different cultures, and this means that only larger organisations tend to look at strategic partnering, to extend their onshore functionality.
The final option for organisations looking to use the offshore model is the wholly owned subsidiary, whereby an onshore company would set up its own offshore extension of the business, and Microsoft is just one example of a company that has done this. As one might imagine this is the most complex of all the offshore models as it requires full commitment and expertise, and thus is slower to ramp up. The company needs to be aware of local culture, laws, and bureaucracy relating to business and employment in the chosen location. If done well, however, this can be a very rewarding approach, but it is of course a very long-term commitment.
The bad press that offshoring has received not only in the UK but in other countries as well has prompted some organisations to abandon the idea of offshoring completely, and others to take a very cautious approach, building their own offshore teams instead of using third-party organisations. There are, however, good reasons for purchasing third party expertise, as well as good reasons for building one's own offshore presence.
Reasons why organisations would buy offshore expertise include the fact that offshore resources are widely available — India is the most well known offshore location, but countries such as the Philippines, China, Hungary, and Russia are all producing high-quality IT graduates. This should be tempered by the fact that there tends to be a high attrition rate, particularly in India, with staff frequently moving from company to company to get the best package. These individuals do look to work for big-name companies — in India these include TCS, Wipro, and Infosys.
At the beginning of this article I talked about the fact that many offshore companies push improved service as being a reason for offshoring — it is true that there is a great deal of investment by big-name companies in intellectual property to be able to service their overseas clients. These providers are very keen to ensure that they are doing everything possible to retain existing customers and attract new ones, thus although this is not the main driver for offshoring, it is one of the reasons for buying offshore expertise.
This is probably a point of some contention, but the performance of many offshore providers can lead customer organisations to a speedy Return on Investment (ROI), a lower failure rate, increased customer satisfaction, and a lower cost — all of these when compared to strategic partnering or developing a wholly owned subsidiary.
Cost remains a big driver for offshoring, and indeed...
...these engagements do result in lower costs for the customer organisation. The savings are achieved not only through the lower labour costs, but also through economies of scale and the providers' expertise in remotely managing teams.
Building one's own offshore presence in a particular country can depend upon a number of factors, including the customer organisation's experience of the selected country, building remote teams, selecting the best employees at all levels for the offshore location, and managing multiple teams at multiple locations. One should also check any projected costs carefully, as it is rare that an onshore firm can build an offshore team at a lower cost than a provider-assisted option. Only if the company has the necessary expertise and is thoroughly confident in the costs should a build approach be considered. Building a wholly-owned subsidiary, effectively Do It Yourself (DIY), can be very expensive (average cost in excess of $5m, or £3m, according to Business Insights) and suffers the biggest failure rate, at around two-thirds. The reasons for this include that the onshore company is responsible for everything, and perhaps does not have the expertise it needs to undertake the task.
If a medium- to long-term offshore presence is required, organisations are recommended to use a partner to build an offshore team — this can help to keep the costs under control, and give the customer organisation time to get comfortable with the location and team being built. The BOT model enables the transfer of the offshore facility to the customer organisation under pre-agreed terms, and can be very successful. By buying in expertise initially, via a local offshore outsourcing vendor building the team, customer organisations are provided with an organisation that knows the locale well and should have a strong understanding of the customer's requirements — a lower level of risk than the DIY model. Once the offshore facility is up and running (this can be anything up to three years), the customer can buy out the offshore facility.
The risk/reward approach has become very popular for customers looking for a relatively safe route for functional outsourcing. This would involve the customer organisation agreeing to give the offshore provider a share in profits (or a higher payment) dependant upon the success of the offshore model. This limits the risk for the customer organisation, but also helps demonstrate commitment and confidence in their abilities for the offshoring provider. Although there are some third-party providers that do not offer this model, it is likely to become more frequently requested by customers, and thus providers will be pushed into offering this.
Working with an offshore provider with a strong presence in the offshoring company is obvious, if some kind of buy option is chosen, but it is also important that the provider has a strong presence in the customer's country of origin. This is for a number of well-known reasons, but includes the fact that there are cultural differences to be overcome that individuals with knowledge of both cultures are able to address (and are experienced at doing so), and that the customer has the opportunity to see people face-to-face more regularly than having to visit the offshore location. Arrangements with this set-up in place have a lower cost base (than outsourcing onshore) and a strong chance of success.
In conclusion, the customer organisation must determine what is to be outsourced, before deciding that offshoring is the way to go (the reverse can often happen when a company is looking to cut costs). The country to be offshored to should be decided — some organisations want a close physical presence or cultural affinity, which is where nearshoring can be of use. Finally, the offshoring organisation must realistically assess its own ability to build an offshore presence in the selected location for the functionality decided, and if in any doubt, some kind of partnership should be entered into. Without this, there is a lower chance of success, which could indeed prove costly.
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